Optimism, not euphoria, seen as fuel for sustained bull run

By Alan Clarke

Originally published on The Post on January 03, 2026

Alan Clarke is portfolio manager for asset manager Amova.

ANALYSIS: But for one seismic shock, watchers of the major global markets and economies in 2025 could have been forgiven for thinking someone had simply pressed repeat on 2024.

Against a backdrop of unresolved geo-political volatility, economic growth continued to hold up better than feared; the impact of lower interest rate settings kept flowing through to businesses and households; and inflation remained in check, with most central banks intent on stimulating spending, investment and growth through interest rate cuts.

In Europe, we did also see the roll-out of large-scale fiscal stimuli through increased defence, infrastructure and clean energy technology spending – something that required the German government to release their own self-imposed “debt brake” to open the fiscal tap. Given that in the decade following the Global Financial Crisis, fiscal austerity had been the medicine prescribed for most of Europe, this change in approach was well received by markets.

The global shock though arrived the day after April Fool’s Day, when US President Donald Trump showed he hadn’t been joking around when he campaigned on a tougher stance on global trade. His “Liberation Day” announcement of heavy tariffs on US trading partners sent equity markets into a tailspin, precipitating a fall in line with market reaction to the Covid-19 lockdown and the GFC. Although markets would recover on the back of a more conciliatory Trump tweet just days later, this set the pattern of uncertainty that continues to this day, with very few trade agreements as yet agreed.

Also consistent with the previous year was the central role played by AI. The whole AI eco-system has been developing at a furious rate since the release of ChatGPT in late 2022. While China’s January release of DeepSeek saw the first real disruption to the anticipated, US-driven trajectory of Large Language Models, Nvidia still ended the year as it began it – at the centre of global market attention. And it’s telling that as 2025 drew to a close, it was the impact and influence of AI, rather than US tariffs, that remained the primary topic for companies across the globe.

Alan Clarke, portfolio manager for Amova, says he expects 2026 will see a continuation of solid returns across the key asset classes.

How global markets have responded

With the notable exception of April’s tariff trauma, market volatility was generally much more subdued than in previous years. The combination of reasonable growth and falling interest rates led to a third consecutive year of strong returns for global equity investors, with the S&P500, Nikkei 225, FTSE100 and Eurostoxx 600 again hitting new all-time highs.

Despite another strong year for the tech-driven US market, it only finished the 2025 race mid-pack, alongside the European and UK markets but outpaced by Japan, Hong Kong and China. But proving that strong performance was truly global, these were all comfortably outperformed by emerging markets including Colombia, Greece, Czech Republic, South Korea, Peru and South Africa.

Australian equities failed to keep pace with their global peers, but were still ahead of our own. New Zealand fixed Income on the other hand was one of the standouts among investment grade countries, delivering strong returns following the rapid rate cuts delivered by the Reserve Bank.

The outlook for 2026

This time last year, we pointed out that we were entering a rare period when we weren’t anticipating great changes in economic growth, inflation or interest rate settings. Despite the lingering scent of volatility, we still expect to see all three indicators remain around “normal” levels, with interest rate settings near to neutral, inflation within the 1%-3% band targeted by central bankers and global economic growth remaining just above 3% in real terms.

However, this isn’t to suggest that nothing has changed – and what is striking is that there is now much greater dispersion between where regions are in their monetary policy cycle. At one end, UK and US short-term interest rates have remained quite high, while Europe, like New Zealand, is much lower with most of their rate cuts behind them. Just to complete the picture, Australia is somewhere in the middle, whereas Japan is still hiking - headed in the other direction!

Interest rate settings remain a key influencer on economic performance, therefore to what extent – and how quickly – lower interest rate settings help stimulate the broader economy will be watched closely by central bankers. Using Europe or indeed New Zealand as an example, if economic growth did move towards or above par, interest rate hikes could be contemplated as soon as 2027.

How the many and varied global actors – governments, businesses, households – react to the uncertain global trade situation will also influence how 2026 unfolds. Companies have done a very good job continuing to deliver earnings growth in what was, and remains, a very uncertain environment for forward planning. In many industries, companies have had to push price increases through to the end user or customer, but they have also shared some of this burden by taking a hit to their margins, or ensuring other businesses in the value chain bear some of the higher cost.

This is important as the risk of another bout of inflation still looms for central banks, and therefore for markets. Caution shown by the likes of the US Federal Reserve and Bank of England is mostly driven by concern that inflation has not yet settled back to the middle of their preferred band. Tariffs remain the most likely cause of potential inflation, and while it’s still very much a case of so far so good, there’s still a lot of uncertainty in this area.

So what does this mean for markets?

Overall, the global outlook for economic growth remains positive. Usually after global equities have delivered three straight years of 15%+ returns, markets might be expected to be “late cycle” – the stage before a recession, when economic growth slows. If this were the case, central banks would be forced into hiking rates, labour markets would be very tight and any fiscal stimulus eased back or removed. But as already pointed out, this is just not the case when we look at current settings.

Market performance will continue to be heavily influenced by how the AI evolution rolls on. The speed at which this new technology is being developed and the amount of money being invested in its potential have already seen parallels drawn with the infamous late 1990s tech-boom investment bubble, which ended badly in the short term. There may also be some parallels to the “Nifty Fifty” craze of the 1970s, where solid companies were bid up to ridiculous valuations on the basis that no price was seen as too high to pay for a great business.

But the key question as to whether this is a bubble, or to borrow the parlance of our times, an era, has yet to be answered. Therefore for now, those main characters in the AI story remain the defining megastars of the US markets.

Beyond the mega-caps, global company earnings expectations still appear achievable, particularly as the impact of lower borrowing costs flows through to businesses and consumers. Valuations are mixed, and in some areas – such as AI-linked companies – expensive, although these are partially justified by the high margins and strong earnings growth. Companies in other areas such as emerging markets, Europe, UK and Asia are generally trading around or below long-term averages.

And then finally, we shouldn’t discount the importance of sentiment as a driver of markets in the shorter term. Events like the April sharp sell-off in global equities and the ongoing geo-political uncertainty serve to keep investor sentiment in check. So while there are undoubtedly pockets of rising sentiment, we remain a long way short of euphoric, and this can aid the longevity of a bull market. Therefore, with a palpable sense of “plus ça change”, I’d expect this next year to see a continuation of solid returns across the key asset classes.